As crude oil inched towards the $50 per barrel mark, the Russian Ruble had a sigh of relief against the Euro and the US dollar.
The EURRUR currency pair declined to hit a low of 72.7861. Russia derives more than half of its revenue from the export of oil and gas. The fall in the price of crude oil saw the Russian fiscal deficit hit a five year high of 2.6% of GDP in 2015. Russia’s budget for 2016 is based on the assumption that oil would stay at $50 per barrel.
Still, such a scenario would result in a deficit of 3% of GDP. With crude oil falling below $30 in January, the deficit threatened to touch 6% of Russia’s GDP. This caused the Ruble to depreciate in an unabated manner. The EURRUR currency pair touched a high of 93.6766 on January 21st, 2016. Since then the surprise bounce back in the price of crude has considerably strengthened the Ruble.
The recovery in the price of crude oil has revived the fortunes of the Russian Ruble. If the crude stays at or near $50 per barrel, the deficit of Russia, with respect to GDP, would be within manageable limits of about 3%. When crude was trading at about $50 per barrel in late October 2015, the Ruble traded at 70 to the Euro. With the US oil rig count down to 332, from 679 a year ago, the prospects of oil holding near $50 per barrel has increased considerably. This means that the Ruble would further strengthen to hit the October exchange rate of 70 against the Euro.
Last Friday, the Dallas Fed President Kaplan announced that he would advocate for an interest rate hike if the second-quarter numbers are encouraging. Kaplan also told that the market is currently underestimating the chance of a Fed rate hike. Short sellers are expected to wind down their position on the basis of this statement. According to the CFTC, the short positions in the US dollar currently stand at its highest in the past three years. When the short covering begins, it would weaken the Euro. This would result in a further decline in the EURRUR currency pair. Thus, fundamentally, a forex trader should cautiously open a short position in the EURRUR counter.
Technically, as the chart indicates, the EURRUR currency pair is trading within the declining channel and below the 50-day moving average. The commodity channel index indicates that the currency pair is currently bearish.
Thus, a forex trader can create a short position in the counter near 0.7500 levels with a stop-loss above 0.7700. During the decline, the profit can be booked near 0.7200. In the same manner, a one-touch put options contract can be purchased by a binary options trader to benefit from the impending fall.
The binary options trader should choose a strike price of about 0.7300 to shift the trade in his favor. Furthermore, the contract will have higher chances of ending in the money, if the expiry period falls in the first week of June.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
